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Dobell: behaviour has at last begun to change

Dobell: behaviour has at last begun to change

M&G Investments' Tom Dobell has faced one of the biggest challenges in his career in the turbulence, but his conviction in his investment process has not been shaken.

In his M&G Recovery fund review for the second half of 2011, Dobell gave the impression he was feeling more upbeat about the market despite there being no 'obvious solution' to the economic woes which afflict the world.

Citywire A-rated Dobell (pictured) said: 'The mountains of debt accumulated by governments and consumers alike on both sides of the Atlantic will take a long time to unwind, in our view, and we are probably only partway through an extended period of adjustment. Behaviour is at last beginning to change, however, and we find this development more encouraging.'

He added: 'Despite the uncertainty that looms ahead of us, we are extremely optimistic about the prospects for he M&G Recovery fund.'

Dobell, a renowned bottom-up stockpicker, accepts he is no economist but believes the by-products of increased short-termism among investors amid the gloom creates a number of opportunities for his seasoned long-term approach.

'In an age when investors are increasingly short-sighted, we can afford the luxury of time and we have not veered from our long-term approach. The past three years has been a particularly busy time for us as the global financial crisis presented opportunities and about a third of the fund has been refreshed during that time,' he said. 

'This is the source of our optimism. We are hopeful that these new ideas, coupled with the greater backing of some of our existing holdings, will fulfil their potential and drive fund performance over the next three to five years.'

The weak links

In the 12 months to the end of February the Citywire Selection M&G Recovery fund managed to eke out a gain of 4.1%. While this may not look spectacular, it is impressive against the 1.53% rise in the FTSE All Share over the same period.

Over three years the fund fares more favourably with a return of 88.9% some 14% higher than that of the benchmark.

Copper producer First Quantum Minerals and sand minerals producer Kenmare Resources were two of the biggest let downs in the second half of the year as they returned the gains they made in the first half. However, both stocks remain key long term holdings for Dobell.

'Even after the recent decline, First Quantum Minerals is valued at more than £5 billion and Kenmare Resources remains a constituent of the mid-cap FTSE 250 Index, having been promoted to a full listing in September 2010, Dobell explains.

'We have confidence in the management teams and stand firm by our view that the long-term opportunity remains exceptional.'

Car dealer Inchcape, a more recent purchase at the 'depth of the financial crisis', also flattered to deceive in the second half and is another Dobell continues to stand by.

'The company [Inchcape] has leading market positions, a strong balance sheet and exposure to some of the world’s fastest growing regions. We believe the recovery potential is outstanding.'  

Technology firm Invensys was another drag on performance. '[Invensys] struggled during the past six months, held back by its perceived economic sensitivity, some uninspiring results and the slow progress in dealing with its pension deficit,' Dobell explained. 

Australian coal firm White Energy was another disappointment he listed. '[White Energy] came under scrutiny after its partner in Indonesia reneged on contracts.'

The strong links

Tullow Oil and Imagination Technologies were among the bright spots in the second half.

'Tullow Oil, a core holding for more than a decade, rallied after announcing a "significant and potentially transformational" discovery in offshore French Guiana. We continue to believe the company has excellent people and attractive prospects.'

Imagination Technologies, where the Recovery fund owns 10% of the equity, was also in demand in the second half after the chip designer reported more of its chips were used in consumer electronic devices. 'The company is profitable, growing quickly and adequately financed. We believe the long-term potential of the business, whose other major shareholders include Intel and Apple, is huge,' Dobell said.

The fund also benefitted from its relatively small exposure to financials. Dobell has no intention of changing his stance as regulatory uncertainty continues to weigh on the sector, even if valuation may appear attractive after the sell off.

'Despite a long period of underperformance, we maintain our cautious stance on the banks, Dobell said. 

'Their business remains difficult to understand, we struggle to find management teams we can trust and we continue to find better ideas in other areas of the market.'

Portfolio changes

Dobell's long term approach means turnover in the fund is low.

One of his biggest purchases in the review period were additions to BP and 'significantly undervalued' GlaxoSmithKline, with the former the fund’s largest holding and one that he has 'carefully' added to since the tragedy in the Gulf of Mexico.

'We have conviction in the quality of the company’s [BP's] assets worldwide and we are optimistic that this will lead to a sustained recovery over time.'

Dobell also raised his holding in British Sky Broadcasting after News Corp’s attempts to buy its subsidiary ended in failure. 'BSkyB is a profitable and growing business, and we believe the cashflows will be substantial for some time.'

Meanwhile he sold completely out Associated British Foods after a 'successful' recovery.

However, Dobell was less satisfied with the sale of Cable & Wireless Worldwide and AEA Technology, which he said he 'wished he had never owned'.

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Tom Dobell
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